German Government Ratifies Revised "VW Law" as EU Threatens Legal Action

Blocking Minority Retained in Revised “VW Law”

The German government has ratified a revised version of the so-called ”VW law”, which governs the management structure and decision-making process at Europe's largest carmaker. The revised legislation retains the controversial blocking minority, which allows any shareholder with a holding of more than 20% to veto major management decisions concerning plant closures and the relocation of production. This means that the state government of Lower Saxony, the region that is home to VW's main Wolfsburg production base, retains its veto as a result of its 20.1% shareholding in the carmaker. The law has existed since 1960 in order to protect VW from foreign takeovers and to safeguard jobs. However, the European Union (EU) became involved when it became clear that the “VW law” contravened statutes demanding the free movement of capital within the bloc. The European Commission ruled in October 2007 (see Germany: 23 October 2008: EU Court Rules "Volkswagen Law" Illegal) that the law was illegal. The German government then drew up amended legislation, which once again retained the blocking minority. This led to European Internal Market and Services Commissioner Charlie McCreevy to write to German Minister of Justice Brigitte Zypries to say that the German government's proposed amendments to the law were not far-reaching enough and that the blocking minority could not be retained.

The German government has made some key amendments in the new “VW law”, which are designed to further increase the power of large shareholders. The government abolished a provision that had limited the voting rights of large shareholders to 20% and withdrew a rule that entitled both the federal government and the state of Lower Saxony to be represented on VW's supervisory board. According to the Wall Street Journal, a spokesperson for the German Justice Ministry, the body that drew up the revised legislation, said, "The way we interpreted the ruling by the European Court of Justice, the voting threshold is legal if it is no longer used in conjunction with the other rules which were struck down." However, if these amendments were designed to placate the EU's internal markets commissioner, they are unlikely to work. Although a spokesperson for the internal markets commissioner admitted that the European Commission had not had time to study the German government proposals in detail, he added, "We insist that the court ruling is applied in full and that if this turns out not to be the case, we will push forward with a procedure for non-respect of a court ruling."

The German government's decision to push ahead with ratifying the new version of the “VW law” comes one day after VW's biggest shareholder, Porsche, launched its own legal action against the blocking minority (see Germany: 27 May 2008: Porsche Files Complaint Against VW Proposal). Porsche lodged a compliant at a regional court in Braunschweig (Germany) in an attempt to clarify the legal situation surrounding the law's blocking minority. The resulting judgment in this case is extremely important if Porsche is to realise its plan to exert full management control over VW. The company currently has a 30.8% stake in VW and is going through the process of seeking regulatory approval to turn this into a majority stake (see Germany: 23 May 2008: Porsche Officially Registers VW Takeover Plan with EU).

Outlook and Implications

The German government's intransigence in carrying out the request of the European Union to abolish the blocking minority would appear to be about political expediency. The individual parties that make up the coalition government led by Chancellor Angela Merkel are currently vying for popularity ahead of the next general election in 2010. The last thing that Merkel and her Christian Democrat Union (CDU) party want at the moment is to be seen as failing to defend the interests of Germany's blue-collar workers at a time of global economic uncertainty. Thus the government is working hard to be seen to be doing everything to maintain Lower Saxony's veto. However, attempts to use a semantic loophole in the EU's original judgment to retain the blocking minority may backfire. Ultimately, the German government is walking a tightrope between maintaining an industrial policy that will not upset the German public and avoiding incurring the wrath of the EU. Ultimately, if the EU does insist that the blocking minority is illegal and is abolished, then at least the German government can claim the decision was ultimately taken out of its hands. Indeed, on announcing that the revised law had been ratified, a spokesperson for the German government told the Wall Street Journal that the "German cabinet noted the law could be further amended if there was a threat of legal action from European authorities." It sounds like the government has already prepared the ground for that outcome and is indeed expecting it.

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